Capitec co-founder Michiel le Roux is the latest executive to hedge his wealth using a collar structure

Shoprite chair Christo Wiese uses them, Capitec director Michiel le Roux finds them useful and Redefine director Harish Mehta feels the same. Netcare CEO Richard Friedland does not appear to have used them very well. In the year to date, directors at Invicta, Curro, Fortress Reit and Redefine Properties have all revealed themselves to be fans of the collar.

"Collars" have been part of institutional share-trading strategies for decades, but they are now increasingly being used by people seeking to raise cash against the value of their shares in a downbeat market.

Sustained bearish conditions have made banks more skittish about accepting shares as security for loans. Recall the huge hit suffered by Citigroup, Goldman Sachs, HSBC and Nomura on the €1.6bn loan to Wiese. The loan was made against 628-million Steinhoff shares, which were worth about €3.2bn at the time.

Now banks are demanding something more secure. And collars are just the thing to do the job.

"If you are using your shares as security for a loan and have a collar in place you won’t need to provide the bank with nearly as much security," says one investment banker.

A collar provides insurance, or a hedge, against the share price dropping below a predetermined level; in exchange, the gains from share prices rising are also limited to a predetermined level.

Last month Capitec announced that Le Roux would use a portion of his shares in the company as security to enable him to diversify his wealth, which is almost totally tied up in Capitec stock at present.

The latest collar, involving 1.25-million shares worth about R1.6bn, brings the total number of Capitec shares now being hedged by Le Roux to 3.75-million, equivalent to 28% of the 13.3-million shares he indirectly owns.

"I have hedged the risk, as I am growing older and need to acquire a little bit of balance in my personal portfolio," says Le Roux, who co-founded Capitec in 2001 and listed it at R2 in 2002.

Like Naspers, Capitec has produced extraordinary wealth for its owners. The share price has increased six-fold over the past five years, from R220 in June 2015 to the current R1,274.60.

Capitec CFO Andre du Plessis tells the FM: "This is an efficient way for Michiel to sweat his balance sheet while not losing ownership of his Capitec shares." In three years, when the contract expires, Le Roux will take back ownership of the stock.

Le Roux’s collar is set between a "put strike price" of R1,161.99 and a "call strike price" of R1,936.62. The critical consideration for Le Roux is that if the share falls below R1,161.99 within the three years, he will be forced to sell them.

Le Roux is Capitec’s second-largest shareholder, behind PSG, which helped to finance the establishment of the bank and now holds 30.69%. The Government Employees Pension Fund is the third-largest, with 6.54%.

Also last month, property group Redefine informed shareholders that Mehta had used a collar to hedge 5-million Redefine shares for one year. In a Sens statement Redefine said the collar, between a low of R7.08 and a high of R9.98, was put in place "due to the volatility in the market". The contract expires in June 2020 and will be cash-settled. During the past 12 months Redefine has traded between a low of R8.34 and a high of R10.92.

While collars have their critics — those who say they betray a lack of faith in a company’s prospects for stock market gains — Anchor Capital CEO Peter Armitage says: "The strike price on either side can tell a story. It’s certainly not a bearish strategy."

In June 2018, when Shoprite was trading at R210, Wiese put a collar in place to protect the value of 17-million of his shares, valued at R3.6bn. The collar was believed to be part of the security Wiese had to provide for a loan. The collar, priced between a low of R205.80 and a high of R273, has provided Wiese with valuable protection from the share’s fall to a current R167.33 and leaves Wiese in a far more comfortable position than he was in December 2017, when the Steinhoff share price collapsed. Wiese was forced to sell Shoprite shares worth R3.3bn that had been used as security for loans to purchase Steinhoff shares.

Last month banks forced Friedland to sell all his Netcare shares, worth R200m, to cover loans used to buy them.

RECM’s Piet Viljoen tells the FM the critical issue in the use of collars by key individuals is that it is disclosed. "When you put a collar in place you are effectively selling the share, possibly with an agreement to buy it back at a later stage," says Viljoen. It’s important that shareholders are made aware of the arrangement. "It can’t be criticised as long as there is disclosure." There wasn’t, in the case of Friedland; shareholders were stunned when they discovered the most critical individual in the company no longer held any shares.